Top Economist Breaks Down the Tax Cuts and Jobs Act for Small Businesses

So you own a small business but you’re not a tax expert. That’s okay, because NAWBO recently brought a top tax expert to our members as part of our regularly scheduled Public Policy calls to discuss changes in tax policy with the passage of the Tax Cuts and Jobs Act. Nicole Kaeding, an economist with the Center for State Tax Policy at the Tax Foundation, broke down the act and what it means for NAWBO members. She was joined by Loreen Gilbert, incoming chair of the NAWBO Institute for Entrepreneurial Development, and Teresa Meares, immediate past chair of NAWBO National and current chair of the NAWBO Institute for Entrepreneurial Development. For those who were unable to join, here’s a recap:

Overview

The Tax Cuts and Jobs Act was signed by President Trump on December 22, 2017. The act made substantial changes to federal, individual and corporate income taxes—the majority of those changes taking effect on January 1, 2018.

Individual Income Tax

Except for the 10 percent tax bracket, all of the tax rates were lowered. The act also expanded the standard deduction, which all filers are entitled to if they choose not to itemize their deduction. The deduction grew from $6,500 to $12,000 for single filers, and from $13,000 to $24,000 for joint filers.

Business Tax Changes

The corporate income tax rate for C corporations was lowered from 35 to 21 percent and became effective on January 1. This is an immediate cut of 14 points to the corporate income tax rate. This also allows full, immediate expensing (100%) for short-lived capital assets, so you no longer have to depreciate them over a depreciation schedule.

Section 179

Expensing for small businesses has been expanded. Previously, the deduction limit was only $500,000 in capital investments—now it’s $1 million in capital investments for businesses with less than $2.5 million in income. That’s good news for a lot of our small businesses throughout the country. They can now immediately write off any capital expenditures they have.

Changes That Help Pay for the Dramatic Cut in Federal Corporation Tax Rate

Net operating losses are limited: If you have a loss in income in any one year, you can carry that forward to the next tax year. This is really beneficial for cyclical businesses that don’t have a straight income stream. Cash accounting was expanded: If you have less than $25 million in gross receipts, compared to $5 million previously, you now can use cash accounting.

Changes to Itemized Deductions:

The charitable giving deduction was retained in the act. If you make a contribution to a non- profit organization, that deduction is still available.

Eliminating the deduction for home equity loans and lines of credit:

This is a change many people missed. The mortgage interest deduction no longer applies to home equity loans and lines of credit. If you have a home equity line of credit on your home, that interest is no longer deductible. Under the new law, you can only deduct up to $10,000 of in-state and local taxes, but this only applies to individual filers. Business filers are still able to deduct that as a necessary business expense.

Child Tax Credit

The child tax credit was expanded from $1,000 to $2,000 per child. In addition, the fazeout was expanded, meaning more individuals will be able to take this credit. Previously, you could only take the credit if you had income below $110,000. Now it’s $400,000.

What the Act Means for Pass-Through Businesses:

Pass-through businesses are when you actually file your business tax return on your individual tax return, so the income “passes through” to the owners. Starting in 2018, pass-through owners receive a large, generous 20 percent deduction from their income. However, the amount of the deduction is limited to 50 percent of wage income or 25 percent of wage income plus depreciable property. You do have to pay yourself some wage income, but definitely take advantage of this deduction. Many service-based industries are exempt, including: health, law, consulting, athletics, financial services, brokerage services or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners—unless you make less than $315,000 in income as a joint filer or $157,500 if single, than it doesn’t apply.

International Taxes

We are now moving to a Territorial Tax System, so if you have income coming from another country, you’re not going to be taxed the differential.

Words of Advice

NAWBO business owners should talk to a tax planner and make sure they know the tax laws in their state so they understand where their business falls at with this new act. It’s important to know how we’re individually impacted. Everyone needs to step up, get educated, get involved and make sure they’re vocal with their local representatives.